Paul Frambot (Morpho): "Aave has its limits and we're here to push them back".
A year after its launch, the French protocol Morpho wants to break away from Aave. Its co-founder, Paul Frambot, criticises decentralised finance (DeFi) for being too inefficient, and reveals the initial details of his new project.
The Big Whale: In a short space of time, Morpho has become a key player in DeFi. Can you introduce the project for those who are not yet familiar with it?
Paul Frambot: Morpho is a lending protocol that allows you to borrow funds from other users in a transparent and decentralised way. We are different from other players in the market, such as Aave or Compound, because we are positioned above them to match users on a peer-to-peer basis in order to offer them better rates.
We optimise price differences, the famous spread, which is inherent in the way existing lending platforms work. The experience for the user is really similar, but with better performance.
You talk about "better performance". How much more efficient are you than going directly through Aave?
In recent days, you could borrow USDC (stablecoin issued by Circle) at a rate of 3.8% on Aave, compared with just 3.3% on Morpho. And the same is true for lenders: for those who want to deposit funds, ethers for example, the yield was 1.32% on Aave and 2.3% on Morpho.
How would you sum up the situation since your launch in June 2022?
The total amount of funds tied up in the application has reached $860 million, which is a fine performance at a time when the markets are in sharp decline. We have become the third largest lending protocol on the market, behind Aave and Compound. Most people who use Morpho do so regularly. We're not an add-on application, we're an established player.
How many people are there at Morpho Labs, the entity driving the project?
We've gone from 6 to 24 in the space of a year. The vast majority of the team, around twenty people, have a 'tech' profile, which is a lot compared with other teams in the sector.
Is Morpho making money? Is it profitable?
That's not our objective, at least in the short term. Given the traction we have, we could obviously impose a fee on Morpho, which would earn us several million dollars a year, but, again, that's not the goal. Our aim is to grow decentralised finance and attract many more users to it.
The Uniswap protocol doesn't charge fees either. Do you have the same strategy?
Uniswap is in the same situation as us: they don't need money in the short term so they are focusing on the growth and efficiency of the protocol rather than looking for profitability. Uniswap's objective now seems to be to be both competitive and compatible with traditional finance (TradFi), not just DeFi.
How long do you expect to operate without charging fees. It can't go on forever?
This decision is not directly up to us because Morpho is a decentralised protocol. Everyone will have to vote, but I think whatever happens it won't happen for several years.
Currently, DeFi is reserved for ultra-rich "crypto degen" who made their fortune in 2013. It's a niche technology. The real challenge is to see what value we can bring to society as a whole.
DeFi seems to be losing momentum a bit recently, how do you explain this?
I think it's precisely not focused enough on this contribution of value I've just been talking about. Far too many projects aren't looking to solve problems.
We've given a lot of thought to how to create DAOs (decentralised autonomous organisations) with a token that works, etc. That's fine, but it's not the way we're going to change global finance.
How do you intend to have a positive impact on society with Morpho?
For me, Morpho is an Internet protocol in the same way that SMTP is a protocol for sending emails.
The big difference is that we're in Web3, which is an Internet of value. Morpho brings together people who have excess capital with others who need financing.
What is missing for DeFi to be used by people other than traders?
First there is an infrastructure problem, but this will eventually be resolved. There is also the issue of transaction fees, which are still too high, and the issue of wallet management, which is too complex. Finally, there's the issue of confidentiality: nobody wants to know how much money I have in my wallet. By tackling these 3 challenges, I think DeFi will be able to be used by people other than traders.
Doesn't DeFi itself need to evolve?
There is indeed still some way to go. At present, we are still a long way from being competitive with traditional finance. To date, there is no reason to use DeFi even though it is possible to invest in US Treasury bonds that yield over 4% a year.
DeFi needs to structure itself to realise the promise of an Internet of value with protocols on which it is possible to build financial applications. I don't believe in DeFi as a financial application itself, even though many have moved in that direction.
You raised $18 million in 2022. What are you using this money for?
To recruit talent, but above all to ensure that Morpho is very secure. We have invested millions to secure the protocol. Even though this is very costly, it makes Morpho the protocol with the highest score from DeFi Safety (98/100), the benchmark tool for assessing protocol security. We are number one out of 350 projects.
One of your investors is Andreeseen Horowitz, one of the best-known Web3 funds in the world. What difference does that make?
Having players of the stature of Andreeseen Horowitz or Variant (another big American Web3 fund, editor's note) is a real plus. The criticism we sometimes hear about them isn't really justified. They do things openly, which is not the case for everyone else, and that's also what exposes them.
When BlackRock influences the strategy of a listed company in which they are shareholders, no one knows. Conversely, Andreeseen Horowitz justifies his decisions publicly on online forums and anyone can access them.
Morpho has not yet released its token (it exists but is not yet transferable, editor's note). What do you think is the right recipe for a token?
Most of the tokens available today don't really have any value. Most of the time, it's based on a system where it's the investors, locked in for several years, who enable the project team to make money by selling their tokens. This is not virtuous.
In my opinion, we need to find the right parameters to encourage investors to behave in the best possible way.
Your token is one of the most eagerly awaited in the DeFi. Do you feel any pressure?
If pressure were measured by the number of messages I receive, then yes I do feel a lot of pressure (laughs, ed.). On a more serious note, there's one issue with our token and that's its transferability. This will be a very important decision that will have an obvious impact on the value of the token.
Some investors have access to crucial information, such as the launch date or price of a token, which enables them to make juicy trades. We often criticise traditional finance, but we don't find this kind of practice here!
If IPOs take six months to go through, there's a reason. The accounts have to be public, everything has to be open... I really want the MORPHO token to become transferable once everything is clear and everyone has the same level of information about the project.
That's not happening just yet. You're going to make some disappointed people...
This is a choice we accept. There's nothing trivial about launching a token. As far as Morpho is concerned, we believe that the project still needs to develop before we can make the token available. We will launch the token when we have unlimited potential growth and are no longer dependent on anyone.
What is your relationship with Aave? More like partners or competitors?
For the current version, i.e. Morpho Optimizer, we're more like partners because we use Aave as our basic support. I have immense respect for the Aave team and for what Stani Kulechov has built. But our aim is to offer the best possible rates, so if we have to step on Aave's toes with our next version, we will.
You have repeatedly pointed out Aave's 'limitations' in recent months. What are they?
We have identified three main points. Firstly, Aave is not as trustless and decentralised as people think. There are more than 500 different risk parameters, which determine how much you can borrow from an asset you have deposited in the protocol.
These parameters are updated very regularly with votes from AAVE token holders, which is not a satisfactory situation for the simple reason that we are asking people, the whole community, to determine parameters that are very complex. In the traditional world, it's risk managers with PhDs who determine these figures, and it's pretty simple to understand why.
To manage all these parameters, Aave pays millions of dollars to risk experts like Gauntlet or Chaos Labs. Every day, the DAO votes on the proposed new parameters, while the calculation of these parameters is done by external players and without any transparency. What I mean is that Aave is based on a broker model that is totally closed source: with this system, no one is able to say whether Aave is safe without trusting third parties.
What are the other problems?
The second problem is its inefficiency on rates and the success of Morpho Optimizer (the current version, ed.) proves it. The rates aren't attractive enough, and there's also the issue of over-collateralisation: at the moment, you have to put up far too many assets as collateral to be able to borrow. This is one of the main weaknesses compared with traditional finance.
Aave is currently the biggest decentralised finance protocol. The team should be able to make these changes successfully?
Making changes like this is quite cumbersome, especially when you've reached this level of development. Every decision takes a long time.
Listening to you, we understand Morpho's ambition. Do you want to become number 1?
We do have a lot of ambition, and I say that with the greatest respect for Aave. I'm one of their first fans, but this protocol has its limits and we're here to push them back and encourage innovation.